Options In Earnings Season

There are several specific types of price behavior that options go
through during earnings season and Steven Placeshares his insights.

My guest today is Steve Place. We're talking about trading
options into earnings and how that works. So, Steve, what's a good way to
kind of get your feet wet trading earnings plays with options?

Okay. What happens with stocks around earnings is that you have these
big, fast, wild moves. You have the gaps up and everything like
that. The options market starts to price those in as we head into
earnings, okay, so, there are ways to profit with options not necessarily
playing the earnings event, but speculating that volatility, at least in the
options pricing, will continue to rise as we head into the earnings event.

So, what strike price are we looking at, and how far away, and what's
the way to kind of get a feel for that?

There's a lot of what I call "black magic" going on there. You also
have to have price targets. I'm a big fan of using technical analysis to
say, you know, get a directional bias and then look to sort of get a long
volatility strategy along with, you know, the direction you're trying to
play.

And am I holding these through earnings, or is this something where
I'll do it right before earnings and get rid of it so I'm out?

Yes. This is a specific set of strategies where you would want to be
long volatility up until the earnings event and then you close it out, because
what happens after earnings is the big move that was priced into the options is
now gone. The short-term risk is now gone, and so there is what's known as
a volatility crush in the options market, and that can affect your long vega,
okay, your long volatility positions.

Okay, and in terms of size. is there a way that you kind of calculate
how much you should be putting on around these plays?

These kinds of trades, if you're going to be speculating into an earnings
run-up you generally want to have limited risk play, so I'm looking, you know,
normally to lose no more than maybe 1%, 1.5% of a trading account when putting
these kinds of strategies on.

How about the overreaction on these earnings plays that often happens; is
that a good time to buy or sell calls right after?

It's very difficult to really do that. It does require a lot of
experience. There are times in which it fades significantly, or there are
times when the momentum really picks up, so what you can do is after the
earnings event, if you get a big gap, everyone's going to have to chase to close
their positions or add those positions on or, you know, adjust their positions
against the risk. So, you can get long volatility through straddles or
strangles, because the implied volatility crush gets out of the market, the
pricing continues to go down, and then you pick up those straddles and then if
the market fades that move really hard or if it continues in the direction of
the momentum, then you can profit from that.

So trading options around earnings; an advanced strategy or can
anybody really try this?

It's a pretty advanced strategy. You know, I would focus more on the
simple directional plays, maybe focusing on indexes first and then once you
learn how implied volatility and how options trade around these events, then you
can start, you know, putting a little risk on the table there.